Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/191374 
Year of Publication: 
2018
Series/Report no.: 
Working Paper No. 032.2018
Publisher: 
Fondazione Eni Enrico Mattei (FEEM), Milano
Abstract: 
We study the effects of granting an exit option that enables the private party to early terminate a PPP project if it turns out to be loss-making. In a continuous time setting with hidden information about stochastic operating profits, we show that a revenue-maximizing government can optimally trade-off direct subsidies for capital investment against the right of opting out the PPP. In particular, the exit option, acting as a risk-sharing device, can soften agency problems and increase the value-for-money of public spending, even while taking into account the budgetary resources needed to resume the project in the event of early termination by the contractor.
Subjects: 
Public Projects
Public-private Partnerships
Adverse Selection
Real Options
Investment Timing
Termination Fees
JEL: 
D81
D82
D86
H54
Document Type: 
Working Paper

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